PMT

Mark Scheme (Results)

Winter 2010

GCE

GCE Economics (6EC03/01)

Edexcel Limited. Registered in England and Wales No. 4496750

Registered Office: One90 High Holborn, London WC1V 7BH
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General Marking Guidance

• All candidates must receive the same treatment. Examiners must mark the
first candidate in exactly the same way as they mark the last.

• Mark schemes should be applied positively. Candidates must be rewarded for

what they have shown they can do rather than penalised for omissions.

• Examiners should mark according to the mark scheme not according to their
perception of where the grade boundaries may lie.

• There is no ceiling on achievement. All marks on the mark scheme should be

used appropriately.

• All the marks on the mark scheme are designed to be awarded. Examiners
should always award full marks if deserved, i.e. if the answer matches the
mark scheme. Examiners should also be prepared to award zero marks if the
candidate’s response is not worthy of credit according to the mark scheme.

• Where some judgement is required, mark schemes will provide the principles
by which marks will be awarded and exemplification may be limited.

• When examiners are in doubt regarding the application of the mark scheme
to a candidate’s response, the team leader must be consulted.

• Crossed out work should be marked UNLESS the candidate has replaced it
with an alternative response.

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General marking observations for supported choice questions

Up to (2 marks) may be earned for knocking out incorrect keys, if the letter of the key
to be eliminated is provided and a valid reason is given, with (1 mark) per key/keys with
reason. For the explanation, (3 marks) can be earned even if key is incorrect, where
the explanation provides sufficient evidence that the question has been understood.

Question Answer Mark

Number
1 C (4)
Definition of high concentration, e.g. reference to a few firms having
a high market share (1 mark)
Calculation of three/four/five etc firm concentration ratio CR 3 =
45.2% CR 4 = 55.2% CR 5 = 64.4% CR 6 = 73.0% CR 7 = 80.7% (1 mark)
Market structure is oligopoly (1 mark)
Other reference to data, e.g. strong brand names (1 mark)

Question Answer Mark

Number
2 B (4)
Definition of economies of scale – falling long run average cost as
output increases or LRAC diagram (1 mark)
Identification (1 mark) and application (1 mark) of one type of
economy of scale to airlines when they join together
Horizontal integration explanation (1 mark)

E.g. bulk buying (type) of fuel (application) = 2 marks

Question Answer Mark

Number
3 B (4)
Definition of marginal cost e.g. cost of producing one more unit, or
formula ‘change in total cost divided by change in quantity’ (1 mark)
Understanding that total costs are constant (1 mark) and therefore
the marginal i.e. change in total cost is zero (1 mark)
Allow ‘no variable costs’ (1 mark) but not ‘all costs are fixed’.

Possible knock outs: It is not C or D because average costs are falling,

it is not A because total costs are constant

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Question Answer Mark

Number
4 A (4)
Definition of normal profit or supernormal profit verbally or as
formulae normal profit AC = AR or supernormal AC<AR (1 mark)
Understanding of the existence of perfect knowledge which means
that these profits attract new firms (1 mark) into the industry
benefitting from no or low barriers to entry such as sunk costs (1
mark) and therefore profits are competed away (1 mark)
Diagram to illustrate entry of new firms in long run up to (2 marks) If
diagram has no industry and just shows long run perfectly competitive
firm (1 mark)

Firm Industry

Question Answer Mark

Number
5 E (4)
Definition of profit maximisation MC = MR (1 mark)

The use of diagram showing the fall in price, fall in output, constant
AC and fall in AR and MR can be rewarded with full marks (3 marks)
cap diagram 2 out of 3 marks if AC or MC are shown to change.

of which shift left/down of AR and MR (1 mark), original and new

equilibrium/price (1 mark), new profit area (1 mark).

A written analysis should include explanation of falling prices (1

mark), output (1 mark) and profits (1 mark), more than just
repeating key. Up to 3 marks

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Question Answer Mark

Number
6 A (4)
Price inelastic demand means that higher revenue for firms is gained
when prices are higher (1 mark)

Game theory:
• Consumers have no choice but to pay the high prices because
of market power (2 mark)
• Possible collusion identification and application (2 marks)
• Understanding that they tend not to trust each other and
therefore they will most likely end up at cell D i.e. both low
prices as a result of a price war (2 marks)

Kinked demand approach:

• Elastic demand if prices rise (1 mark), but inelastic
demand if prices fall (1 mark). Diagram showing a kink in
AR or demand (1 mark)

Interdependence (1 mark)

Question Answer Mark

Number
7 C (4)
Definition of monopolistic competition or at least one characteristic
e.g. firms have differentiated products and therefore the demand is
not perfectly elastic has low barriers to entry, many firms (1 mark)

Explanation of lack of productive efficiency (1 mark)

Explanation of lack of allocative efficiency (1 mark)

Supernormal profits will be competed away in long run OR only normal

profits in the long run (1 mark)

Diagram to illustrate long run position showing allocative and

productive inefficiency can rewarded up to (2 marks)

Question Answer Mark

Number
8 D (4)
Role of a regulator (1 mark)

After a certain amount of profit is earned, the marginal tax rate is

100% (everything is taxed) (1 mark)

The company will be allowed to charge a price equal to the

average cost of production (1 mark),

A ‘fair’ rate of return on capital is allowed for firms (1 mark)

which removes all incentive to make efficiency gains or
increase profits (1 mark).
Contrast with other forms of regulation (1 mark).

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General marking observations for data questions

50% of the marks are to be awarded for evaluation, in all except the 4 mark questions.
The Levels of Response are to be used as general guidance, but marks must be awarded
if criteria on the mark scheme are identified.

Question Answer Mark

Number
9(a) Theory (2 marks): a monopoly (1 mark) – at least reference to one (4)
characteristic (1 mark) or identification of Competition Commission legal
definition of 25 per cent of market share (1 mark)

Application to information provided (2 marks): e.g. ‘BAA’s ownership of

London’s three largest airports’ (Extract 1, line 6) (1 mark)

Allow oligopoly up to 4 marks, if argued convincingly that there is a

degree of competition in the London market. This must be supported
by evidence, e.g. reference to Luton and City Airport as non-BAA owned
in Figure 1.

Question Indicative content (14)

Number
9(b) Concept of increased competition (e.g. there will be more firms in the
market) (1 mark)

Benefits of competition up to 6 marks for 2 or 3 benefits (3+3 or 2+2+2

or 3+2+1). These may include:
Consumer benefits (passengers)
• Lower prices for consumers, as costs fall
• Better service – candidates could expand on this as a secondary
point – for example
o Fewer delays
o Fewer bags lost
o Better experience
o Smaller queues
o Better transport links
Consumer benefits (airlines)
• Greater choice of airports
• Greater productive or allocative efficiency – candidates could try to
compare monopoly with perfect competition to illustrate the gains
• Higher profits
Government benefits
• More tax income
• Improved trade

Answers must be focused in airports, but airlines can be viewed as

customers.
Evaluation 7 marks - up to 3 marks + 4 marks for each evaluation point
made, or 2 + 2 + 3 marks or 2 + 2 +2 +1 or similar, best four points
only. Points might include
• Allocative inefficiency as firms spend money trying to compete.

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• Loss of economies of scale causing LR average costs to increase

• Loss of integrated connections between airports
• Consumer confusion
• Discussion whether the airport market can sustain competition or
whether it is essentially a natural monopoly.
• Even after the sale of airports an oligopoly will still exist which
may exploit the consumer
• Reduced contestability
• Reduced profitability may deter new entrants or investment
Level Mark Descriptor
Level 1 1-3 Identification of one benefit (1) and explanation of this benefit (2)
Level 2 4-7 Identification of three benefits (up to 3) and explanation of these
benefits (up to 3) Brief evaluation (1)
Level 3 8-14 Identification of three benefits (up to 3) and explanation of these
benefits (up to 3). Evaluation (2 points x 3 marks or 3 points x 2
marks) – total for evaluation 7 marks

Question Answer Mark

Number
9(c) KAA 4 marks (2 x 2 marks or 1 x 4 marks)
Factors might include:
• Role of Competition Commission (CC)(2 marks)
• Application to an industry, this may include airports or airlines (2
marks)
• Specific types of regulation or powers of the CC (2 marks)
• Enterprise Act 2002 e.g. the CC directs not just advises increased
powers to fine 10% revenue for three years, jails term for directors,
ability to force sale of assets (2 marks).
Evaluation 4 marks (2 x 2 marks or 1 x 4 marks)
• Award counterarguments to the points above, either for or against
regulation
• Indication of the problem that faces the authorities in trying to
encourage competition e.g. regulatory capture, information
asymmetry. This may include reference to the extract.
• Time for investigation is too long
• Cases need to be referred (selection or time issue)
• EC supersedes CC and other issues regarding international regulation
• Regulation meant to only be a short term solution until competition is
possible
• Also reward the arguments offered in Extract 2 as to why regulation
and planning would be better
• Government failure may reduce effectiveness of regulation
• Competition may cause problems outlined above – don’t reward a
repetition of the answer to 9b

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Question Indicative content

Number (14)
9(d) KAA 7 marks
Reasons for policy (up to 4 marks 2 x 2 marks or 1 x 4 marks):
• Increased profits
• Increased revenue/demand
• Price inelastic demand/monopoly power
• Higher costs
• Increased market share in markets where demand is more elastic
• Prevent other firms from entering the more contestable markets
• Analysis of price discrimination
• Allow up to 2 marks for a firm sub-markets diagram showing different
elasticities prices,
• Application of data e.g. Heathrow with low PED and Gatwick with
higher PED (could be on diagram)

Consequences of policy (up to 4 marks 2 x 2 marks or 1 x 4 marks) might

include:
• Profits/revenue/market share increase
• Involvement of the Competition Commission
• Lost consumer welfare as fare prices rise
• Effect on airlines – less profit, higher costs
• Deters new entrants

Evaluation: (up to 7 marks for 2 points 4+3 or 3 points 3+2+2 or

2+2+2+1 or similar)
Points might include:
• This is price differentiation/product differentiation NOT price
discrimination
• Arrival of competition may mean that the policy cannot last in the
long run
• If prices are too high this may have a wider impact on the demand for
London as a tourist and business destination, which will force the
regulator/competition commission to intervene
• Excess profits may attract undue attention from regulator
• Relative price of other airports
• Other costs might be more significant to airlines, e.g. fuel or cabin
crew
• Other problems of price/product differentiation
• Other wider issues, e.g. externalities impact (the ‘environment’)

Level Mark Descriptor

Level 1 1-3 Definition of price discrimination (1), identification of a cause
and consequences of policy (2)
Level 2 4-7 Identification of several valid causes and consequences, with
limited explanation/application
Level 3 8-14 Well applied and explained causes and consequences. Evaluation
(2 points x 2+3 marks or 3 points x 2 + 2 +1 marks) – total for
evaluation 7 marks

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Question Answer Mark

Number
10(a) Theory (2 marks): An oligopoly (1 mark) – at least reference to one (4)
characteristic (1 mark)
Application to pharmaceutical industry (2 marks): identification of
characteristics in evidence provided

Question Indicative content

Number
10(b) KAA 6 marks (12)
Identification and explanation of up to 3 benefits to Merck
(2+2+2 or 3+3 or 3+2+1)

These may include

• Economies of scale (accept 3 economies of scale as different

factors) – marketing, financial, risk bearing, R &D
• Access to new markets e.g. Schering 70% of market outside US
• Access to new patents
• Protection from unwanted predators
• Higher market share, e.g. elimination of competition,
widening scope

Must be benefits to Merck, not other stakeholders

Evaluation: Award 6 marks (2+2+2 or 3+3 or 3+2+1)

Factors may include

• Diseconomies of scale
• Likely costs of the merger e.g. dilution of shareholder value
• Possible investigation by competition agencies such as the Federal
Trade Commission
• Possibility that the merger might not succeed
• Possibility that the firms will not be able to adequately integrate
• Time lags in realising the benefits.
Level Mark Descriptor
Level 1 1-3 Identification and weak explanation of up to 2 benefits 3 marks
Level 2 4-6 Identification and explanation of up to 3 benefits 6 marks Brief
evaluation (1)
Level 3 7-12 Identification and explanation of up to 3 benefits 6 marks
Evaluation: Identification and explanation of up to 3 evaluation
6 marks

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Question Indicative content

Number
10(c) 6 KAA marks or which (3 marks) for price strategy and (3 marks) for non-price.
Award as 3 marks for 1 point or 2 + 1 for two points

Identification of one price strategy (1) and application and/or analysis (2).
Strategies may include:
• Predatory pricing
• Limit pricing
• Sales maximisation
• Revenue maximisation
• Buy one get one free
• Price discrimination
• Undercutting rivals

Identification of one non-price strategy (1) and application and/or analysis (2).
Strategies may include:
• Further increases in efficiency
• Investment into new technology to increase productivity.
• Improve product quality
• Marketing campaign to win business customers.
• Advertising
• Promotion through other means, bundling products (which may be identical)
• Move production abroad
• External growth

Award maximum 4/6 if no reference to the pharmaceutical industry.

Evaluation (3+3 or 2+2+2 or 3+2+1)

A range of ideas could be developed, for example:
¾ It may be harder to make further increases in efficiency; all firms trying to
engage in R&D
¾ Depends on PEDs
¾ There may be retaliation, e.g. price war
¾ Short term/long term success
¾ Investment /R&D is expensive and there is no guarantee of success.
¾ Improving product quality is expensive
¾ Marketing is expensive and no guarantee of success
¾ Predatory pricing is illegal so there might be fines
¾ Benefits or costs to other stakeholders.
Level Mark Descriptor
Level 1 1-3 Identification of one non-price or price strategy (1) and analysis (2).
Level 2 4-7 Identification of one non-price and price strategy (2) and analysis (4).
Brief evaluation (1)
Level 3 8-12 Identification of one non-price and price strategy (2) and analysis (4).
Extensive evaluation (Up to 6)

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Question Indicative content

Number
10(d) KAA 6 marks (3 marks for consumers and 3 marks for employees) of which (3
or 2+1)

Identification and explanation of advantages to consumers

• Economies of scale and other synergies mean lower LRAC and therefore
lower prices
• Greater profits/R & D budgets mean more breakthroughs
• Reduction in competition may mean firms can divide up market to research
particular areas of expertise, so more choice for consumers

Employees
• Increased job security as profits rise
• Higher wages/perks
• Share options increase in value
• More scope for promotion in larger firms
• Allow non worsening situation as being in the interests of employees

Evaluation 6 marks (3 + 3 marks or 2 + 2 + 2 marks)

Factors may include:
• Greater possibility of collusion to raise prices
• Less incentive to innovate and produce better drugs
• Increased chance of x-inefficiency and exploitation or price discrimination
• Prices rise if there are diseconomies of scale
• Worker redundancies
• Morale issues
• Less choice because there are fewer firms
Level Mark Descriptor
Level 1 1-3 Identification of advantages to consumers (Up to 3 marks)
Level 2 4-6 Some understanding of public interest – benefit to consumers. 1 mark
Identification and explanation of 2 advantages to consumers (Up to 4 marks)
Limited evaluation (Up to 2)
Level 3 7-12 Identification and explanation of 2 advantages to consumers (Up to 4 marks)
Extensive evaluation (Up to 6)

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Knowledge Application Analysis Evaluation Total

1 1 2 1 0 4
2 2 1 1 0 4
3 1 1 2 0 4
4 1 1 2 0 4
5 2 1 2 0 4
6 2 1 1 0 4
7 2 1 1 0 4
8 1 2 1 0 4

9a 1 2 1 0 4
9b 2 2 3 7 14
9c 2 2 0 4 8
9d 2 2 3 7 14

10a 1 2 1 0 4
10b 2 2 2 6 12
10c 2 2 2 6 12
10d 2 2 2 6 12

Total 18 18 18 18
Total (%) 25 25 25 25

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